Regulation took centre stage in part one of our ESG industry outlook series. A number of legislations will come into force this year, causing the level of disclosure and reporting required by companies and funds to be ramped up.
It has long been noted that in this relatively young space, data is not up to scratch. This is due to a lack of disclosure guidance from regulators, but also impetus from asset managers to place emphasis on ESG data.
“Data and the quality of it is very important,” Curt Custard, CIO at Newton Investment Management, told ESG Clarity. “In the asset management space, we are used to robust data infrastructure and reporting, but now it just doesn’t exist for ESG.”
But in a step forward for the responsible investment industry, commentators agreed 2021 will be a year where ESG disclosure and reporting will become a major feature and should see improvements.
“ESG analysis can be relatively backward looking,” said Rebecca Craddock-Taylor, director of sustainable investment at Gresham House. “The biggest challenge is going to be how we start looking forward. Ultimately, the success of sustainability relies on us looking forward and potentially stepping outside our comfort zone. The UK Government’s Ten Point Plan for a Green Industrial Revolution is an example that we cannot wait for governments to develop fully thought-through policies before we act.
“No one knows what perfect looks like yet because there is no rulebook in sustainability. Instead, it is about taking steps forward.”
However, with clarity still needed regarding certain regulations, such as the Sustainable Finance Disclosure Regulation (SFDR) as highlighted in part one, it can be extremely difficult for companies to get to grips with what is required.
“I am pretty sure all asset managers are struggling with this right now,” said Custard.
Volker Lainer, VP of product management and regulatory affairs at data management solutions provider GoldenSource, agreed: “The immediate problem for investment managers and corporates alike is that there is still lots of uncertainty around SFDR, in particular around what is considered ‘materially harmful’ and how this should be categorised. For example, there is no agreement yet on how much carbon emissions are considered harmful and how this affects a company’s ESG rating.”
Despite this, Lainer urged companies to improve their disclosure and data ahead of any confirmation of what is required.
“Even with a lack of standardisation and specifications currently in flux, investment firms need to be in a position to publish their strategy by the 10 March to be aligned operationally to implement the RTS – level 2 of SFDR – in January 2022. However, firms should by no means see this deadline as an end point. On the contrary. In fact, this initial step should be seen as a foundation that underpins a longer-term view of ESG and its role in asset management in driving investors’ risk decisions.”
He suggested firms could, as a bare minimum, capture, analyse, identify and report just enough data on a yearly basis to meet the specifications of the regulation, or alternatively go further by collecting and providing greater amounts of granular ESG data to their investors, covering different asset classes, sectors, regions, historical analysis etc.
“By doing this, fund managers put themselves in a position where they can educate and inform, with a view to increasing their investor base and fund inflows. To achieve this, though, firms will need to access multiple data sources that will provide the breadth and depth of information currently available.”
Concentration and greenwashing
However, with so many question marks remaining, concerns also surround the impact of groups almost blindly finding their way in what they need to be reporting, with investor concentration and greenwashing highlighted as most troubling.
Therese Niklasson, global head of ESG at Ninety One Asset Management, said we could see investors flocking to a smaller number of companies simply because they are disclosing better than others.
“There is a lack of available data as asset managers are asked to comply with SFDR and with that a risk of unintended consequences. We could see investors concentration in companies with the right disclosures but only for that reason.”
This could also leave behind smaller companies that do not have the support or resources required to assess and report on their ESG risks, pointed out Craddock-Taylor.
Jim Wood-Smith, CIO private clients and head of research at Hawksmoor Investment Management, said while regulation is being put in place to weed out the greenwashers, unclear disclosure requirements can enhance greenwashing.
“Investors will more than ever need to understand what is, and what is not, being disclosed by both companies and funds. The rewards of being seen as ‘ESG’ will become increasingly apparent to company boards as they move up in independent ESG ratings and attract more active and passive buying of their shares. The incentives to greenwash grow stronger by the day, and it will become even more difficult for investors to know that they are not being hoodwinked and that investment choices are genuinely aligned with the objectives.”
So, while there are hopes 2021 could be a major turning point in terms of ESG data and disclosure, there are still so many uncertainties. “No one knows what perfect looks like yet”, commented Craddock-Taylor.
Nonetheless, Barclays Private Bank’s head of sustainable and impact investing, Damian Payiatakis, said those demonstrating “authenticity” will be leaders of the pack.
“Many firms today, and into 2021, will state or promote that they are responsible investors. It’s reminiscent of the principle of full disclosure in economic theory, with every male frog croaking at night. But, similarly, the reality is there a range of capabilities across, and importantly within firms, around the strength of their responsible investment practice. Firms that can demonstrate their authenticity and expertise in 2021 have the opportunity to stand out among this increasingly crowded and noisy field.”
GoldenSource’s Lainer is also optimistic. He said instead of looking at the new regulatory requirements as a hurdle, investment managers should see this as an opportunity to “communicate ESG concerns effectively with investors by providing more regular updates than SFDR requires, but with data that will help to cut through the considerable noise that surrounds ESG”.
“However, as is always the way with these things, firms will need to establish their SFDR framework that can adapt to the changing metrics and classification of this relatively new field of investing. Only with a solid foundation can the investment world hope to provide monthly, daily, or event-driven reporting of ESG metrics.”
